Chinese Steel Demand Improves

With around half of the world’s production, China is by far the most influential country in the global steel industry. In recent years, a slow-down in demand in the country has led to an explosion in exports as Chinese producers sought new markets rather than cut production which subsequently had a profound effect on world prices.  In the past few months, however, there is evidence that this trend has reversed.

At the start of 2016, in response to the lower domestic demand, Chinese production was predicted to decline in the year as a whole. In the first two months of the year, this trend was apparent with a fall of nearly 6% year on year.  In March, however, this trend reversed and Chinese production started showing a year on year rise each month which accelerated from August through to November.  The upshot of this is that by the end of the year, Chinese production actually posted a 1% rise in the year as a whole.

In the past, the consequence of this rise in production would have been a subsequent growth in exports but this has not been evident in 2016. In the first half of the year, Chinese exports of total steel did indeed continue on their growth trajectory with a rise of more than 9%.  In the second half of the year, however, just when production growth started to accelerate, Chinese exports actually declined with Q3 showing a 9% reversal and Q4 posting an astonishing decline of nearly 20% year on year with the lowest quarterly total since Q2 2014.

This phenomenon has helped propel global prices for nearly all steel products and raw materials to highs not seen since 2014 and would suggest a big hike in Chinese demand for steel but is this the full story? It seems as though this has not led to a build in stock as Chinese steel inventories as a proportion of production were at a historic low of 8.2 percent in November. It appears that this increase in apparent demand reflected in consumption, prompted by an unexpected round of credit stimulus in 2016 as the government pushed money into infrastructure to maintain GDP growth at around 6.5%.

China’s chief government forecaster has said that a predicted decline in steel demand would not happen in 2017 as a decrease in steel use by the property sector this year would be offset by strong railway, port and highway construction. He said that China’s crude steel production would rise by about 0.3 per cent with a further reduction in exports.

It seems then, with real Chinese domestic demand improving and exports declining, partially as a result of anti-dumping legislation being enacted across the world, that the near term prognosis for the global steel industry is better than it has been for some time. At 23.9MT in Q4, Chinese exports are still highly elevated, by historic levels, at a level above the total annual figure for Italy, however, so any small percentage change to the demand outlook in the country would have a profound effect on the industry as a whole.

Chinese Steel Demand Improves

Chinese Exports on the Rise Again

Despite the slow-down in Chinese demand for steel, crude steel production in the country actually increased by 1.3% year on year in quarter two to 209.4 million tonnes.  This had a predictable effect on exports as a very strong June figure of 10.4 million tonnes means that shipments from China in Q2 increased by over 10% to 29.9 million tonnes, the second highest quarterly export figure in history.

This is a situation that is not new of course, and in recent years we have seen Chinese producers looking increasingly further afield in their search for export markets.  It is therefore rather surprising to see this trend reverse strongly over the last quarter with shipments to other Asian counties, including the Middle East, increase by 25% whereas exports to non-Asian counties actually declined by 20%.

Aside from a large growth in shipments of HR Bars to Saudi Arabia and UAE, all of the other significant increases have been to other South East Asian countries with exports to Thailand up 83%, exports to Vietnam increasing by 39%, shipments to Taiwan up 37% and shipments to Indonesia more than doubling year on year.  In contrast, exports to India were down 28%, shipments to the EU fell by 30%, exports to the US collapsed by 61% and shipments to Brazil declined by 66%.

The reasons for this change are somewhat varied.  Exports to Brazil are likely to be down due to the dire state of the economy, ironically partly caused by a reduction in Chinese demand for steel and the knock-on effect for economies that are dependent on mining commodities.  It is also true that shipping rates have ticked up somewhat since the low in Q1, although this is unlikely to have been enough to deter many producers shipping outside South East Asia.  It is also true that Asian economies are expected to grow more strongly than those in other parts of the world with the ASEAN five consisting of Indonesia, Malaysia, Philippines, Thailand and Vietnam predicted by the IMF to grow GDP by 4.8% this year.

It seems as though the bulk of the change could actually be as a result of a growing concern globally of the threat of Chinese steel on global markets and the increase of protectionist measures introduced to combat the issue of Chinese dumping.  We have mentioned previously the robust anti-dumping measures implemented by the US which have had a direct effect on Chinese exports to the US market.  India has also made a concerted effort to try and shelter its domestic market from cheap imports.  In February, the government imposed a floor price on the import of 173 steel products and in March extended import taxes on some products until 2018. Last month, they imposed a provisional anti-dumping duty on seamless tubes and pipes imported from China.

In comparison the EU response has been more muted but could the ongoing objection by Eurofer to China being granted market economy status, as is being considered by the EU, have encouraged Chinese producers to be less aggressive in their targeting of EU markets?  This has coincided with the announcement that China will step up its efforts to cut some 45 million tonnes of capacity this year after only hitting a third of its target in the first half.  Whether this increased effort to cut capacity along with a reduction in the “dumping” of steel in European markets is a genuine effort to address global industry concerns or more of a temporary measure to smooth the country’s progress to be seen as a “market economy” remains to be seen.

It will be interesting to see if this trend continues for the rest of the year and whether the granting of market economy status to China, if it comes to pass, will have an effect.  In the long-term the continued increase in protectionist legislation around the world is unlikely to be positive for the global industry but in an environment where a country responsible for producing around half of the world’s steel is ramping up production for export in a market that is already heavily over-supplied this response is understandable and unlikely to reverse until Chinese over capacity is tackled decisively.


Chinese Exports on the Rise Again

Chinese CSP Shoots Up in March

The decline in Chinese domestic demand for steel has been well documented and there had been reports in the press of government plans to cut some of the older, more polluting capacity and to reduce annual production by around 150 million tonnes in five years.  There has been very little evidence of any progress being made in this regard, however, as although Chinese production fell by 3% year on year in the first quarter, the traditionally strong month of March actually saw production increase by 1% to 70.7 million tonnes which, incredibly, represents the second highest ever monthly production figure from the country.

This increase in production in a market that is struggling with sluggish demand had the now familiar effect on exports.  Shipments in March were a staggering 30% above those of March 2015. Although it should be noted that February and March last year suffered temporary declines due to the government’s decision to remove tax rebates from exports of steel containing boron.  Nevertheless the figure of 9.9 million tonnes is still substantial, has been bettered only four times in history and was enough to give a quarterly export figure 8% above that of Q1 last year.

So where is all of this extra Chinese steel going?  It is clear that it is not being shipped to the US as that country has moved quickly to protect its domestic industry against the threat of cheap Chinese steel products with swift anti-dumping tariffs being enacted.  This has led to a 71% collapse in Chinese exports to the USA in Q1 and we have also seen a 66% fall in shipments to Brazil as demand for steel in that country has suffered.  The largest increases in tonnage terms have been to Thailand, Vietnam and the Indian subcontinent with exports to India, Pakistan and Bangladesh all increasing considerably.

We have also seen an increase in exports to Turkey, which were up 56% year on year, and a growth in shipments to the EU, which increased by 22% with Italy suffering the brunt of the effects with tonnage that nearly doubled in the quarter.  In addition, there has been a three-fold increase in Chinese exports to Algeria, itself an important market for Italian steel producers.

This growth in Chinese production and exports has taken the industry by surprise somewhat, with many sources expecting a decline in Chinese output rather than a large tonnage of surplus Chinese production making its way onto the global market.  This, combined with the news that some 41 blast furnaces have been brought back on line in the country and the fact that there remains considerable overcapacity in the market is concerning and calls into question the sustainability of the recent global price increases seen in the industry.

Chinese CSP Shoots Up in March

Chinese Trade in Coal and Coke

We have covered the trade in Chinese steel and iron ore in considerable detail here in the past but ISSB also monitors the trade in some other products and today we are looking at the Chinese coal and coke trade. China is the world’s largest producer and consumer of coal but the country only became a net importer in 2009.  Since then, Chinese imports of coal increased by over 150% to peak at 327 million tonnes in 2013 with internal production estimated at around 3.7 billion tonnes.  Since 2013, however, it has been a familiar story with reduced industrial demand leading to falling imports, which in 2015 were down 36% from the peak just two years prior, and an over capacity situation which is estimated by Reuters as being an astonishing 2 billion tonnes last year.

China imports most of its coal from Australia and Indonesia and the price of Australian hard coking coal has nearly halved since the end of 2013 to just over $76 per tonne as of the end of last week. The Chinese Government has responded by stopping approvals for new coal mines for three years but given the current huge overcapacity, this is unlikely to make much of a dent on falling prices.  In addition, however, there are plans within China to reduce capacity by some 70 million tonnes internally but again, given the estimated 2 billion tonnes of overcapacity, it is hard to see this having much of an effect either given the predicted fall in industrial demand for the raw material in 2016.

One option for China to use this excess coal being produced is to turn it into coke, subject to coke oven capacity, and in contrast to coal, China is a net exporter of coke and is the largest supplier in the world. Last year Chinese exports increased further, up more than 11% when compared to 2014 and represented close to a nine-fold increase in exports since 2012.   At the start of 2013, the 40% tax on metallurgical coke exports from China was removed, despite the detrimental effect on air quality on production of the material, opening the door for supply to enter the already oversaturated global market with predictable consequences on prices as export prices fell by 47% over the past three years.  The largest markets for Chinese coke are India, Japan and Brazil but as with steel, there is evidence that in some of these countries measures are being taken to protect domestic producers with India initiating anti-dumping procedures against imports of coke from China.

Going forward, it is hard to see any of the government initiatives having much of an effect on the coal producing overcapacity situation in China and as with coal, global demand for coke is weak. Unless the export tax is reinstated or markets are successful with their anti-dumping initiatives, downward pressures are likely to remain on the price of coke as well as coal, with fundamentals which closely mirror those that we have seen in iron ore and steel.


Chinese Trade in Coal and Coke

Chinese Exports Hit Record Levels – November 2015

We have covered the growing importance of Chinese exports here several times before, commenting that Chinese producers have been able to get around the government’s ending of the tax rebate of the export of boron steels by replacing boron with other alloying elements, most notably chromium.

This growth shows no sign of abating and the latest September export figures for China show that they exported a record amount during the month with the total of 10.8 million tonnes being nearly 10% higher than the previous highest tonnage. With the year to date figure nearly 30% ahead of last year, 2015 will be a record year with the total very likely to be above 100 million tonnes which will be the first time in history any country country’s exports have crossed this milestone.

The destination of these increased exports is varied. Chinese steel producers have targeted the EU with a 42% increase in shipments to the region with exports to Italy, Spain and Belgium showing particularly high growth levels. Emerging markets have also been targeted with shipments to Africa up 62% and the Middle East increasing by 27% but it is the Indian subcontinent where exports have really taken off with shipments to India growing by 33%, Pakistan up by 86% and Bangladesh increasing nearly six-fold. South Korea remains the most important market by tonnage for Chinese steel but with shipments increasing by a modest 6% it is clear that other, newer markets are being targeted. In contrast to most other countries in the world, by introducing tough anti-dumping measures, the US has managed to limit the flood of Chinese steel into their market, with shipments falling by 28% so far this year.

As we have noted previously, in order to gain tax rebates from the Chinese government, the steel producers in the country routinely add alloying elements to their steel and so far this year an incredible 76% of all Chinese exports are categorised as “alloy” steel. There has been a large increase in many products with HRC and wire rod both increasing by more than one million tonnes but the real growth has been in “alloy HR bars” which have doubled to an astonishing 22 million tonnes in the first nine months of the year. The truth is actually somewhat different as this category has become a bit of a catch-all for Chinese exporters with everything from billets to rebar to genuine alloy bars being included under this heading.

With the WSA forecasting the demand for steel in China will decline by 3.5% this year and another 2% next year, it seems likely that Chinese producers will continue to target export markets and unless excess capacity is drastically reduced within the country, which is not a popular political decision, exports are likely to remain at least at these elevated levels for the foreseeable future.

Chinese Exports Hit Record Levels – November 2015

Chinese Exports Bounce Back – August 2015

We have reported before on how falling demand for steel in China coupled with a relatively modest decline in production has led to a boom in exports from the country. Last time we suggested that measures put in place by the Chinese government to curb the addition of boron to steel in order to qualify for tax rebates was likely to have only a temporary effect on export levels.

Immediately following the removal of the tax rebate on steel containing boron, monthly exports fell from 9.8 million tonnes to 7.4 million tonnes but as expected, resourceful Chinese steel makers adapted to the changes by finding other alloying elements to add to their steel in order to qualify for the rebate and export levels recovered to 8.4 million tonnes in June. Although this is some way below the peak months at the end of last year, exports in the first half of this year were 29% higher than in the first half of last year at 49.8 million tonnes, a figure in excess of a whole year’s production in Germany.

Interestingly China’s largest export market, South Korea, did not see an increase in the first half of the year with the country’s producers instead directing their steel towards the second largest market, Vietnam, who saw imports from China increase by 69% to 4.4 million tonnes. Within Asia we also see huge increases to SE Asia with exports to the Philippines, Malaysia and Indonesia showing strong growth. In addition, there were large increases to the Indian Subcontinent with exports to India, Pakistan and Bangladesh all growing by more than 50% with exports to the latter country increasing more than eight-fold year on year.

Outside Asia the US seems to have had some success in stemming the tide of Chinese imports as exports to the States fell by 4% and although we have seen some large increases in many countries in the MENA region, it is Turkey that has seen the largest increase outside of Asia as the country’s majority EAF based steelmakers struggle to compete with the very low cost BOS based Chinese production. The EU also continued to see increasing levels of Chinese imports as exports to the region increased by 31% year on year. Traditionally it has been the UK that has been most susceptible but so far this year, it is Italy that has suffered the largest increase with Chinese exports to the country increasing by an incredible 88% to over one million tonnes. Once again, it is notable that Italy is a country with a high proportion of EAF steelmakers who are finding it difficult to compete with the ultra-low prices of Chinese BOS producers.

The increase in Chinese exports is having a tangible effect on the domestic steel markets within these countries. Turkish crude steel production is down 6% year on year and crude steel production in Italy has collapsed by 11% when compared to the first half of last year. It is unsurprising, therefore that following the lead from the US, the European Commission opened an investigation into alleged dumping of cold-rolled flat steel by China and Russia in May and has imposed a series of tariffs to counter surging imports of various grades of steel, including stainless.

Chinese Exports Bounce Back – August 2015

Chinese Exports Reach Record Levels – February 2015

A topical and concerning issue relates to the slowdown in Chinese demand for steel and we have seen evidence in 2014 that this had led to a huge increase of Chinese steel exports. When compared to the previous year, exports in 2014 were some 51% higher at nearly 93 million tonnes and the December figure of 10.2 million tonnes was the highest monthly total ever recorded.
South Korea remained the most important export market for Chinese steel and recorded the highest increase in tonnage terms with exports to the country increasing by 3.3 million tonnes but on percentage terms the increase was relatively modest, up just 33%. Other major Asian destinations for Chinese steel were Vietnam, up 71%; Philippines, up 96% and India, up an incredible 131% to 3.8 million tonnes. Outside Asia the largest market was the US with exports up 57% to 3.3 million tonnes with other important markets in the Middle East, Saudi Arabia and UAE up 91% and 75% respectively. Additionally we have seen increased exports to the EU with the quantity increasing by 73% as tonnage sent to the UK and Italy more than doubled when compared to the 2013 total.
As far as products are concerned, exports increased across both long and flat with exports of HR bars more than doubling to an incredible 18.4MT and HR wide strip also doubling to 13MT. Over the past few years the Chinese authorities have granted a tax rebate on exports of higher quality alloy steel in an effort to encourage producers to move up the value chain.

This has encouraged some Chinese steel makers to look for novel methods to qualify for this rebate. Steel is considered to be alloy if it contains just 0.0008% of boron and these producers have been adding this metal to their steel in order to qualify for the duty rebate that is worth more than five times the costs of the boron that is added. Consequently the largest constituent of exports are alloy bars and alloy flat products exported under tariff codes 722830 and 722530 respectively. Earlier this year it was announced that the Chinese authorities are abolishing this rebate for boron steel so it will be interesting to see how Chinese producers adapt to this change, possibly by finding the next most cost effective alloying metal to add to their steel that will not be detrimental to the properties of the steel itself.
After a record year for Chinese exports and one where the monthly totals have been increasing to the point where December was the highest monthly total ever, will this strength continue into 2015? Despite some large infrastructure projects it seems unlikely that Chinese demand will recover from last year’s 4% decline in the short term and the removal of duty rebates for boron steel is unlikely to curtail exports as producers switch to other alloying metals. Therefore, unless some of the older, more inefficient capacity is taken out of the system in China, which could well happen as the government starts to take environmental concerns more seriously, it would seem that these high levels of exports could be here for quite some time with preliminary figures for January suggesting a further modest increase which would make that month a new record high.

Chinese Exports Reach Record Levels – February 2015